Private Equity Aims to Snatch Up Banks

Very interesting piece from yesterday’s New York Times. Private equity manager J. Christopher Flowers buys a tiny bank in Missouri in the hopes of using its national charter to snap up ailing banks across the country. The last two paragraphs are among the juiciest: Flowers “has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. ‘I find it to be an extraordinary time to invest,’ he said. He was even more blunt when he spoke to an industry group in New York earlier this year. ‘Lowlife grave dancers like me will make a fortune,’ he predicted.”

As Investors Circle Ailing Banks, Fed Sets Limits

By Eric Lipton | May 5, 2009

CAINSVILLE, Mo.—No one seems to want to own a business in this dusty, windswept corner of rural America, population 370, with its crumbling sidewalks and boarded-up storefronts.

Except, that is, for J. Christopher Flowers, a media-shy New York billionaire who last year bought the First National Bank of Cainesville, one of the United States’ smallest national banks.

Mr. Flowers, a private equity manager, has no particular love for rural Missouri; in fact, he has never set foot in Cainsville. Rather, he wants to use the national bank charter he picked up in this farm town to go on a nationwide buying spree.

With that charter in hand, Mr. Flowers plans to take over a handful of large struggling banks, casualties of the economic crisis. In some cases, he hopes, the federal government will help.

But Mr. Flowers, whose investments in banks overseas have made him one of the richest men in America, has run into a major obstacle in the United States: the Federal Reserve, and its very notion of what a bank should be.

The Fed does not mind if private equity firms have a minority interest in banks—the Obama administration even wants them to invest. But the Fed will not let them take control, a stance the firms are lobbying regulators mightily to change, especially given that stress test results to be released Thursday are expected to show a glaring need for capital in the banking system.

It’s not personal, Fed officials say. It’s just that as the nation recovers from one of the worst banking crises in history, the Federal Reserve wants to make sure that it does not set the stage for the next financial implosion by turning banks over to private equity firms, some of the riskiest players in the business world.

So while Mr. Flowers was able to buy the bank here with his own money, he cannot tap into the billions his firm, J. C. Flowers & Company, has raised.

How this battle—and others being fought in the aftermath of the economic crisis—plays out will help determine the future shape of the financial industry.

For all the talk of the banking crisis, Mr. Flowers and other giant private equity players are circling distressed banks around the country, competing to buy into the industry. Bidding wars are now breaking out among private equity firms, including the Carlyle Group, which is going up against Mr. Flowers’s firm for a stake in BankUnited of Florida.

They and other investors see banks as the recession’s biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale. But like Mr. Flowers, some of them would prefer to take over the banks completely, replace their managements and take all the profit.